Qualifications and Standards for Standing Trustees

DEPARTMENT OF JUSTICE

28 CFR Part 58

RIN 1105-AA32

Qualifications and Standards for Standing Trustees

AGENCY: United States Trustees, Department of Justice.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This final rule amends the qualifications for appointment as a

standing trustee, sets forth the continuing qualifications for

appointment and standards of conduct for standing trustees, and

corrects certain typographical errors in part 58.

The qualifications for appointment as a standing trustee are

amended to provide that certain persons who are related to standing

trustees and bankruptcy judges and clerks cannot be appointed as

standing trustee. The rule also sets forth fiduciary standards that

govern a standing trustee's operation. These fiduciary standards

address the employment of relatives, dealings with related parties, and

employment of other standing trustees. The rule will aid the Director

of the Executive Office for United States Trustees and the United

States Trustees in supervising standing trustees in the administration

of cases and in evaluating the actual, necessary expenses of standing

trustees relative to fixing appropriate percentage fees and

compensation. Adherence to the rule will help to ensure the fair,

impartial administration of the office of the standing trustee, to

maximize the efficiency of case administration, and to avoid

improprieties, whether actual or perceived, that could diminish the

integrity of the standing trustee system and the administration of

chapter 12 and chapter 13 bankruptcy cases.

EFFECTIVE DATE: This rule is effective July 2, 1997 to those standing

trustees who are appointed as of July 2, 1997, this rule will be

applicable on the first day of the next fiscal year (i.e., October 1,

1997 for chapter 13 trustees, and January 1, 1998 for chapter 12

trustees).

ADDRESSES: Office of the General Counsel, Executive Office for United

States Trustees, 901 E Street, N.W., Room 740, Washington, D.C. 20530.

FOR FURTHER INFORMATION CONTACT: Martha L. Davis, General Counsel, or

Jeanne M. Crouse, Attorney, (202) 307-1399. This is not a toll-free

number.

SUPPLEMENTARY INFORMATION: This final rule amends the qualifications

for appointment as standing trustee and establishes standards for

standing trustees appointed and supervised by United States Trustees.

Finally, it corrects typographical errors in part 58. A proposed rule

on these subjects was published in the Federal Register on July 18,

1996 (61 FR 37426) (the ``proposed rule''). A summary of background

information, public comment, and agency response follows.

I. Background and Rulemaking History

Chapter 13 makes bankruptcy relief available to individuals with

regular income and limited debt. Chapter 13 debtors propose plans to

repay their creditors over a three-year period, unless the court, for

cause, approves a longer period that cannot exceed five years. The

plans must meet certain requirements and must be confirmed by the

court. 11 U.S.C. 1322, 1325. Cases are administered by a private

trustee appointed by the United States Trustee.

Chapter 12 of the Bankruptcy Code provides for the adjustment of

debts of a family farmer with regular income. Like chapter 13, chapter

12 enables debtors to devote their disposable income to a repayment

plan over a three-year period, unless the court, for cause, approves a

longer period that cannot exceed five years. As in chapter 13, debtors'

payments in chapter 12 are collected and disbursed by a private trustee

appointed by the United States Trustee.

When the Bankruptcy Code was adopted pursuant to the Bankruptcy

Reform Act of 1978, Public Law 95-598, 92 Stat. 2549 (1978), Congress

established a pilot United States Trustee Program in 18 districts.

Congress created this system to assume administrative tasks that the

bankruptcy courts had performed previously. Congress' review of the

prior bankruptcy system had led it to conclude that court oversight did

not work well and created the appearance of bias. See H.R. Rep. No.

595, 95th Cong., 1st Sess. 88-109 (1977), reprinted in 1978

U.S.C.C.A.N. 5787, 6049-71.

The success of the pilot Program led Congress in 1986 to expand it

nationwide as a permanent component of the Department of Justice.

Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy

Act of 1986, Public Law 99-554, 100 Stat. 3088 (1986). Today, United

States Trustees are appointed by the Attorney General to serve in 21

regions defined in 28 U.S.C. 581. The Attorney General provides general

supervision, coordination and assistance to the United States Trustees,

28 U.S.C. 586(a)(5)-(6), (c), and is assisted by the Director of the

Executive Office for United States Trustees (``Director''). 28 CFR

0.38. Throughout this Preamble, the Department will refer to the

Director and the United States Trustees collectively as the

``Program.''

With regard to the administration of chapter 12 and 13 cases, the

United States Trustee is authorized to appoint one or more standing

trustees, subject to the Attorney General's approval, if ``the number

of cases * * * commenced in a particular region so warrants * * *'' 28

U.S.C. 586(b). Once appointed, the standing trustee administers all

chapter 12 or 13 cases filed in a designated geographic area unless a

conflict exists. The United States Trustees supervise ``any such

individual appointed as standing trustee in the performance of the

duties of standing trustee.'' 28 U.S.C. 586(b). If a standing trustee

has not been appointed or has a conflict of interest, the United States

Trustees appoint individuals to serve as trustees on a case-by-case

basis pursuant to 11 U.S.C. 1202(a) or 1302(a) or will themselves serve

as trustee.

Standing trustees appointed under 28 U.S.C. 586(b) serve the same

function in administering cases as trustees appointed under 11 U.S.C.

1202(a) or 1302(a) to handle a particular case, but the method by which

standing trustees receive compensation and reimbursement of expenses is

entirely different. Trustees appointed on a case-by-case basis are

awarded compensation and reimbursement of expenses from each specific

estate by order of the bankruptcy court, after application, notice and

hearing. See 11 U.S.C. 326(b), 330 (authorizing bankruptcy courts to

award compensation to trustees appointed on a case-by-case basis under

sections 1202(a), 1302(a)). In contrast, standing trustees collect a

flat percentage of plan payments made by debtors in all cases that they

administer to fund their compensation and expenses. 28 U.S.C. 586(e);

see also 11 U.S.C. 326(b) (prohibiting courts from awarding

compensation or reimbursement of expenses to standing trustees

appointed under 28 U.S.C. 586(b)).

The percentage fee that each standing trustee collects is set by

the Director as the Attorney General's delegatee, in consultation with

the United States Trustee for the region in which the standing trustee

operates. 28 U.S.C. 586(e)(1)(B). The Attorney General also has

authorized the Director to set the maximum annual compensation of each

standing trustee at an amount not to exceed the highest annual rate of

basic pay in effect for level V of the Executive Schedule and the

comparable cash value of employment benefits. 28 U.S.C. 586(e)(1)(A).

[[Page 30173]]

To determine which expenses are actual and necessary, the Director

and the United States Trustee have adopted certain procedures. Before

each fiscal year, standing trustees submit proposed budgets with

projected revenues and expenses to the United States Trustee in their

region. Program employees analyze the budgets and supplemental

documents that are submitted and request additional information when

appropriate. The Director ultimately determines which expenses appear

to be ``actual'' and ``necessary.'' The Director, in consultation with

the appropriate United States Trustee, also establishes the annual

compensation for each standing trustee. Once compensation and expenses

are determined, a percentage fee for each standing trustee is

calculated and memorialized.

In a chapter 13 case, the fee may not exceed ten percent of

payments received under the plan. 28 U.S.C. 586(e)(1)(B)(i). In a

chapter 12 case, the fee may not exceed 10 percent of all payments made

by the debtor up to $450,000 and three percent of all payments over

$450,000. 28 U.S.C. 586(e)(1)(B)(ii). The funds collected pursuant to

the percentage fee can be used only to pay the standing trustee's

compensation and ``actual, necessary expenses.'' 28 U.S.C. 586(e)(1).

If excess funds are collected, they must be turned over to the United

States Trustee System Fund. 28 U.S.C. 586(e)(2).

Therefore, regardless of the number of cases that a standing

trustee administers, the trustee's maximum annual compensation cannot

exceed the statutory limit, nor can the total amount of compensation

and expenses exceed 10% of total plan payments (or whatever lesser

percentage has been fixed by the Attorney General). The legislative

history notes that this system was enacted ``to encourage the standing

trustees to keep costs low at the risk of reduced compensation.'' H.R.

Rep. No. 595, 95th Cong., 1st Sess. 107 (1977), reprinted in 1978

U.S.C.C.A.N. 6068.

The need for adequate safeguards has become increasingly important

in chapter 13 standing trustee operations given the numbers of cases

and the sums of monies entrusted to standing trustees. According to

information published by the Administrative Office of the United States

Courts in 1983, ``Chapter XIII flourished under the Bankruptcy Act[,]

increasing from 3,260 cases in 1940 to 39,442 cases in 1979.'' V-A

Administrative Office of U.S. Courts, Guide to Judiciary Policies and

Procedures, Bankruptcy Manual, Ch. III, app. 1 at 2 (Jan. 17, 1983).

For the year ending September 30, 1996, annual national filings climbed

to 336,615 new chapter 13 cases and more than $2 billion was

administered. In FY 96, the entire chapter 13 system was managed by

approximately 170 individuals who served as standing trustees. Their

use of trust funds requires adequate safeguards to ensure the debtors'

monies are expended appropriately.

Beginning in late 1994, the United States Trustee and the Director

considered the standing trustees' practices of hiring relatives,

engaging in related-party transactions, and allocating expenses between

related parties. They also considered revising the qualifications for

appointment. A subcommittee of United States Trustee analyzed these

issues. The United States Trustee and the Director concluded that

promulgation of a rule would provide standards, achieve greater

consistency in the application of Program policies, and open the

bankruptcy system.

Before the rule was published, the Program engaged in wide-ranging

consultation on the issues to be addressed by the rulemaking. Various

United States Trustee, the Director, the Deputy Directory, and other

Program employees met with standing trustees and representatives from

the National Association of Chapter 13 Trustees and the Association of

Chapter 12 Trustees. On August 1, 1995, the United States Trustees

distributed draft standards to all standing trustees and solicited

written comments.

Upon consideration of the submitted comments, the standards were

revised. Throughout the revision period, members of the subcommittee

and the Executive Office continued to meet with standing trustees,

their associations, bankruptcy judges, and other interested parties at

meetings across the country to discuss the proposed standards and

obtain additional comments. The result of this lengthy process

culminated in the publication of a proposed rule in the Federal

Register for notice and comment. See 61 FR 37426 (July 18, 1996) (to be

codified at 28 CFR 58.4).

II. Purpose of the Rule

Through this rulemaking, the Program is adopting a prophylactic

rule to prohibit standing trustees from hiring relatives and from

engaging in dealings with themselves and related parties. Under the

compensation mechanism set forth in 28 U.S.C. 586, standing trustees

collect a percentage of all payments made by debtors to fund their

operations. These monies are used, first, to pay all actual and

necessary expenses of the trustee, and, second, to pay the trustee's

compensation.

When the Code was first adopted in 1978, standing trustee

operations were much smaller than they are today. At that time,

substantial economic incentive existed for standing trustees to

minimize their expenses because every dollar that funded expenses meant

one less dollar was available to pay the standing trustee's

compensation.

This built-in incentive to minimize costs has largely vanished.

Chapter 13 case filings have surged without a corresponding increase in

the total number of standing trustees appointed. Standing trustees now

administer significantly greater numbers of cases and handle vastly

larger sums of money.

Trustee operations have grown so large and handle so much money

that, in FY 97, 83 percent of chapter 13 standing trustees are eligible

to earn maximum compensation (which the Attorney General has fixed at

$126,473). With larger operations, however, comes a potential for

misuse of trust funds and an opportunity for standing trustees to

augment their personal or family's income by using trust funds to hire

relatives or otherwise engage in self-dealing. These situations may

also tempt standing trustees to expand the concept of necessary

personnel benefits. For example, one commenter stated that standing

trustees should be permitted to use trust funds to purchase such items

as flowers, alcohol, food, party supplies, and gifts for their staff

members. The Program believes that such items are not normally

necessary to the administration of bankruptcy cases. When the items are

purchased to benefit relatives of the trustee, it becomes even more

difficult to determine whether the items are actually necessary for the

administration of the trust or whether the trustee's relationship with

relatives played a role in the decision to purchase the items.

Because the use of trust funds in connection with related parties

raises similar issues that are far more difficult to identify and

evaluate, the Program is adopting a rule prohibiting future employment

of relatives and future contracts or expense allocations between

related parties. A prophylactic rule avoids situations in which United

States Trustees have to micromanage daily or monthly expenditures by

the standing trustees and bolsters public confidence that the

bankruptcy system is not being operated to benefit the standing

trustees at the expense of the debtors and creditors they are appointed

to serve.

However, application of this rule change current operations in some

standing trustee offices and, thus, certain provisions of the rule

minimize possible disruption and allow a gradual transition. All

spouses who were hired

[[Page 30174]]

prior to August 1, 1995, are excepted from the rule prohibiting the

hiring of relatives. Standing trustees also may seek two-year waivers

from their United States Trustees to allow them to retain other

currently employed relatives if the trustees can demonstrate that the

relative's continued employment is necessary to the trust and the cost

of the relative's compensation is reasonable.

The differing treatment of existing spouses and non-spousal

relatives is attributable to several concerns that standing trustees

raised during the informal consultation period. Some trustees located

in rural areas have come to rely on their spouses to provide necessary

office support; if spouses can no longer serve this function, the local

employment base may make it difficult for the standing trustees to find

replacements with comparable skills and experience. To require their

replacement may visit a unique disruption on the standing trustees'

operations. Standing trustees also argued that spouses generally played

a vital role in starting their operations and thus acquired knowledge

about the standing trustee operation that cannot be easily replaced.

To minimize possible disruption and allow a gradual transition to

implement the rule governing related-party transactions, standing

trustees may also seek an extension of time for compliance, not to

exceed specified deadlines. The rule prohibiting all related-party

transactions also gives United States Trustees the discretion to grant

a waiver in situations involving a newly-appointed trustee who is

starting operations. Finally, the rule prohibiting allocations among

related parties gives the United States Trustees discretion to grant a

limited waiver in appropriate circumstances, such as when a standing

trustee is not able to earn compensation or when a standing chapter 13

trustee also serves as a chapter 12 trustee.

III. Summary of Major Changes in Final Rule

The final rule differs from the proposed rule in the following

ways: First, the Program has modified the rule's effective date. The

final rule will be effective 30 days after publication except as to

current standing trustees. With respect to existing chapter 13 standing

trustees, the rule is effective on October 1, 1997, the first day of

their next fiscal year. As to current chapter 12 standing trustees, the

rule is effective January 1, 1998, the first day of their fiscal year.

Second, the final rule changes the definition of ``relative'' by

identifying the relatives so as to provide clearer guidance to those

who must abide by and implement the rule.

The final rule also incorporates certain technical changes to

clarify that, to obtain a waiver, a standing trustee must demonstrate

that the expense is being used to purchase a good or service that is

necessary to the administration of the bankruptcy cases and that the

price is reasonable. This clarification comports with the statutory

requirement that expenses be ``actual'' and ``necessary.'' The Program

believes that an expense is an ``actual, necessary expense'' if it is

actually used to purchase a good or service that is necessary for the

administration of the bankruptcy cases, and the amount of the expense

is reasonable for that particular good or service. Other technical

changes clarify the definition of ``region'' and clarify that the rule

applies to individuals only in their capacity as standing trustees.

IV. Discussion of Public Comments

The Program received 20 comments on the proposed rule. Although

four comments were submitted late, the Program noted that the late

submissions either reflected concerns that had been raised in timely

comments or reflected amendments to earlier comments. The Program chose

to consider these submissions even though they were untimely. One

comment was submitted by an attorney who represents standing trustees;

one comment was submitted by a bankruptcy judge; and two comments were

submitted by trustee organizations. The remaining comments were

submitted by standing trustees. The Program has considered each comment

carefully and appreciates the time taken to provide them. The Program's

responses to the comments are discussed below, either in the ``General

Comments'' section or in the ``Section-by-Section Analysis''.

A. General Comments

1. A number of commenters questioned whether the Department has the

authority to promulgate the rule. One commenter added that only the

Attorney General has the authority to issue the proposed regulation.

The Program has determined that it possesses ample statutory

authority to promulgate this regulation pursuant to these sources: 5

U.S.C. 301, which enables the Attorney General to issue regulations

governing the conduct of Department employees and the performance of

agency business; 28 U.S.C. 509, which vests in the Attorney General all

functions of her employees; 28 U.S.C. 586, which authorizes the

Attorney General and the United States Trustees to appoint and

supervise standing trustees, to fix compensation and the percentage fee

of standing trustees based on their actual, necessary expenses, and to

prescribe by rule the qualifications for appointment of standing

trustees; and 28 U.S.C. 586(c), which obligates the Attorney General to

supervise United States Trustees and provide them with general

coordination and assistance. The Attorney General has delegated her

authority to issue this rule to the Director. Order No. 2041-96 (July

5, 1996). See also 28 U.S.C. 510.

2. Several commenters stated that the promulgation of the rule

exceeds the authority that Congress granted to the Program in that

Congress did not intend the United States Trustees to supervise the

conduct of standing trustees. This position is not supported by either

the statute or its legislative history.

Section 586 confers broad powers on the United States Trustees to

review the conduct of standing trustees that they have appointed. Each

United States Trustee ``shall * * * supervise the administration of

cases and trustees in cases under chapter * * * 12 or 13.'' 28 U.S.C.

586(a)(3). Moreover, ``[t]he United States Trustee * * * shall

supervise any such individual appointed as standing trustee in the

performance of the duties of standing trustee.'' 28 U.S.C. 586(b).

Finally, the Program is authorized to set both the compensation of the

standing trustee and the fee that may be collected from cases to cover

the standing trustee's compensation and ``actual, necessary expenses.''

28 U.S.C. 586(e)(1). The legislative history supports this conclusion:

The nature of the duties of the United States trustees makes

them the administrative officers of the bankruptcy system * * *. The

United States trustees will, * * * be responsible for the day-to-day

operations of the bankruptcy system. They will supervise trustees,

assist them in the performance of their duties, oversee their

actions, and see to it that the bankruptcy laws are properly

executed * * *.

* * * [The United States trustees] will be responsible for

determining the needs of the chapter 13 system, and whether a

particular judicial district is best served by a private standing

trustee or an assistant United States trustee. They will enforce the

qualifications prescribed by the Attorney General for service as a

chapter 13 trustee, and will supervise the performance of chapter 13

trustees. They will consult with the Attorney General to fix the

fees that a private standing chapter 13 trustee may charge, and the

salary that the private trustee may receive.

H.R. Rep. No. 595, 95th Cong., 1st Sess. 109 (1977), reprinted in 1978

U.S.C.C.A.N. 6070-71. See also H.R. Rep. No. 595, 95th Cong., 1st Sess.

102

[[Page 30175]]

(1977), reprinted in 1978 U.S.C.C.A.N. 6063 (``United States trustees

will also monitor the performance of panel members and standing chapter

13 trustees in order to determine whether they should be continued in

or removed from panel membership or office.'').

The Program's authority over the compensation and expenses of

standing trustees is further necessitated by the express lack of court

authority over these matters. Section 326(b) of title 11, U.S. Code,

prohibits a court from awarding compensation and expenses to a standing

trustee appointed under 28 U.S.C. 586(b). Thus, unless the Program

exerts supervision in this critical area, standing trustees would be

unsupervised in their use of debtors' funds for the expenses of their

trust operations.

Several standing trustees also averred in their comments that the

standards run contrary to Congressional intent in that Congress did not

expect a centralized office to run the Program and that the rule

eliminates the flexibility that Congress intended to build into the

system. These comments reflect a misunderstanding of the statute and

mistake the genesis of the rule. As noted above, Congress gave the

Attorney General the authority to prescribe the qualifications for

appointment as standing trustee, establish the compensation of standing

trustees, determine the ``actual, necessary expenses'' that may be

compensated from chapter 12 and 13 estates, and set the percentage fee

to be charged to each bankruptcy case. 28 U.S.C. 586 (d), (e)(1). The

Attorney General also established the Executive Office for United

States Trustees to fulfill her responsibility of providing ``general

coordination and assistance to the United States Trustees'' who

supervise the standing trustees. 28 U.S.C. 586(c).

The rule was proposed by the United States Trustees after they

considered the problems caused when standing trustees hire relatives

and engage in related-party transactions. The proposed rule was then

considered and issued by the Director, pursuant to the authority

delegated to him by the Attorney General. Thus, promulgation of the

rule does not contravene the administrative scheme that Congress

envisioned in 1978.

On the contrary, the rule helps fulfill Congress' original intent

to create a standing trustee fee system that provided an incentive to

minimize administrative expenses: ``The fee system [for standing

trustees] is designed to encourage the standing trustees to keep costs

low at the risk of reduced compensation.'' H.R. Rep. No. 595, 95th

Cong., 1st Sess. 107 (1977), reprinted in 1978 U.S.C.C.A.N. 6068. When

limited funds are available, a standing trustee theoretically will

minimize costs to maximize the funds available to pay compensation.

As we explain in Section II of this preamble, the concept of the

limited funds no longer exists. Standing trustees who receive maximum

compensation, as most do today, have no institutional incentive to

minimize costs. Without a profit motive to hold down expenses and with

compensation set at maximum levels, the potential exists to augment

compensation through expenses that accrue to the benefit of the

standing trustee or a related party. As one commenter candidly

admitted, ``This [rule] is an attempt to prohibit a non government

employee from achieving additional income at no detriment to the

debtors and/or taxpayers.'' This attitude ignores the fact that

unnecessary costs hurt creditors by diminishing the amounts they

receive on their claims or hurt debtors by requiring them to make

larger payments under confirmed plans. Furthermore, when those costs

are paid to the standing trustee or a related entity, they are

perceived to compromise the standing trustee's fiduciary obligations.

3. Several commenters stated that the Program is improperly issuing

retroactive rules. These commenters misapprehend the concept of

retroactivity.

As discussed previously, the rule will be implemented

prospectively. Generally, the rule will go into effect 30 days after

the date of publication. With respect to current standing trustees, the

rule will not be effective until the first day of the trustees' next

fiscal year. That date is October 1, 1997, for standing trustees who

serve in chapter 13 cases and January 1, 1998, for standing trustees

who serve in chapter 12 cases. All budgeted expenses that have been

submitted and approved for the current fiscal year will be unaffected

by this rule. Moreover, certain standards, such as those prohibiting

the hiring of relatives and prohibiting related-party transactions,

provide for limited waivers in appropriate circumstances. Thus,

provisions of the rule will be applied prospectively and are not

retroactive rulemaking.

4. One commenter argued that the rulemaking is unconstitutional

because the final rule will not apply to bankruptcy cases in two states

(Alabama and North Carolina) and, thus, will violate the Uniformity

Clause of the U.S. Constitution, art. I, Section 8, cl. 4 (``The

Congress shall have Power * * * [t]o establish * * * uniform Laws on

the subject of Bankruptcies throughout the United States; * * *'').

The Program disagrees with this legal conclusion. Congress

initially established the Program in 1978 as a pilot program in 18

federal judicial districts. Bankruptcy Reform Act of 1978, Public Law

95-598, Sec. 1501, 92 Stat. 2652 (1978). After evaluating the pilot

program, Congress in 1986 made the Program permanent in all federal

judicial districts but decided to phase in implementation, bringing

some federal districts in later than others. Bankruptcy Judges, United

States Trustees, and Family Farmer Bankruptcy Act of 1986, Public Law

99-554, 100 Stat. 3118-24, Sections 301-02 (1986). The last six

judicial districts, which covered the states of Alabama and North

Carolina, were scheduled to come into the Program no later than October

1, 1992. In 1990, Congress extended the deadline for the final six

districts to October 1, 2002. Judicial Improvements Act of 1990, Public

Law 101-650, 104 Stat. 5115, Section 317(a) (1990). It is the statute,

not this rulemaking, that creates the distinction between cases in

Alabama and North Carolina and those in the rest of the country.

These rules are promulgated in furtherance of the Program's

statutory obligations to oversee the administration of bankruptcy cases

and standing trustees. The statute does not alter substantitive

bankruptcy law but simply authorizes the United States Trustees to

further the efficient administration of bankruptcy matters. The United

States Trustees' statutory duties are described in terms such as

``supervise,'' ``monitor,'' ``appoint,'' and ``make * * * reports.'' 28

U.S.C. 586. The organic statute creating the Program leaves the

substantive debtor-creditor relationship unchanged; it simply provides

for an administrative watchdog, the Program, to ensure the fairness and

efficacy of the process through which debtors and creditors resolve

their rights and obligations under substantive bankruptcy law. This

does not violate the Uniformity Clause.

Furthermore, Congress' decision to implement the Program gradually

was rational. Congress has applied the statute in all federal

districts; it has simply phased in its application. The Uniformity

Clause does not preclude such a phase-in. Cf. City of New Orleans v.

Dukes, 427 U.S. 297, 303 (1976) (per curiam) (``Legislatures may

implement their program step by step''). Accordingly, the Program finds

no merit to this constitutional concern.

5. A few commenters implied that many actual abuses had to exist

before the Program had a right to promulgate

[[Page 30176]]

standards. One stated, ``A few instances of abuse cannot in any

reasonable mind be considered as grounds for national standards * *

*.'' Another asserted that the United States Trustees presently have

all the tools they need to combat fraud and abuses within the standing

trustee system.

The Department of Justice, through the Program, is responsible for

supervising standing trustees and establishing their compensation and

percentage fees. Congress established and then expanded the Program to

improve and strengthen the integrity of the bankruptcy system and

eliminate the problems that arose when the system was administered by

the courts.

Based on the United States Trustees' expertise and experience in

supervising standing trustees, a prophylactic rule is desirable and

necessary, particularly in the area of related-party dealings. These

dealings foster recurring problems such as hiring relatives at above

market rates, hiring relatives where the United States Trustee could

not verify that the relatives performed services, renting office space

to trustee operations at above the market rate to cover mortgage

payments and taxes, and using bankruptcy trust funds to subsidize

another business in which the trustee is involved.

When the trustee decides to hire a relative as a new employee,

establishes a salary for that employee, and ultimately analyzes the

relative's advancement within the trustee's organization, the trustee

as decisionmaker has a conflict of interest. For similar reasons,

nepotism is prohibited within the Federal government and in many

private sector organizations. When trustees employ relatives, it is

difficult for the supervising United States Trustees to review the

trustees' employment decisions and to assess whether the expense is

``actual'' and ``necessary'' without micromanaging the trustees'

operations. A prophylactic rule is needed to prevent the problems

widely associated with nepotism and related-party dealings.

Experience has taught that the overall impact of a relative's

hiring cannot be easily evaluated or discovered through any review or

other documentary process. Nor can such problems be identified through

personal interviews with the trustees' employees. Employees are

understandably reluctant to critize the trustee's relative or to

describe the deleterious effects on office morale.

Standing trustees who contract or otherwise do business with

related parties face a similar conflict of interest that is exacerbated

because the trustee derives income or other financial benefits from

these transactions. The current system, in which more than three-

fourths of the standing trustees earn maximum compensation, offers no

economic incentive to minimize or reduce expenses. Related-party

arrangements increase a trustee's personal or family income and are

paid for by the bankruptcy estates. Yet chapter 12 or 13 debtors cannot

challenge these expenses; nor can they select a trustee through a

competitive process. The bankruptcy system does not allow a debtor to

retain the service provider (standing trustee) whose expenses are lower

or less questionable.

Because of the difficulties inherent in related-party transactions,

other agencies have promulgated prophylactic rules in similar

circumstances: 42 CFR 413.153(b), (c) (Medicare regulation prohibiting

reimbursements for interest expenses on loans between related parties);

29 CFR 2550.408b-2 (Department of Labor regulations prohibiting self-

dealing of ERISA trustees).

Bankruptcy trustees under the common law are held to the highest

fiduciary standards of loyalty, which standards have been implemented

and applied with ``[u]ncompromising rigidity.'' Meinhard v. Salmon, 249

N.Y. 458, 464, 164 N.E. 545, 546 (1928) (Cardozo, C.J.). In Woods v.

City National Bank & Trust Co., 312 U.S. 262, 278, reh'g denied, 312

U.S. 716 (1941), the Supreme Court held that trustees who violated the

duty of loyalty are not entitled to any compensation for services to

the bankruptcy estate regardless of whether the estate had been harmed.

Woods, 312 U.S. at 268.

The Court reemphasized this principle in Mosser v. Darrow, 341 U.S.

26 (1951), when it found that a bankruptcy trustee could be surcharged

for $40,000 in profits he permitted his employees to earn using

fiduciary monies. The Court rejected the trustee's argument that his

actions had not damaged the estate:

Equity tolerates in bankruptcy trustees no interest adverse to

the trust. This is not because such interest are always corrupt but

because they are always corrupting. By its exclusion of the trustee

from any personal interest, it seeks to avoid such delicate

inquiries as we have here into the conduct of its own appointees by

exacting from them forbearance of all opportunities by exacting from

them forbearings of all opportunities to advance self-interest that

might bring the disinterestedness of their administration into

question.

These strict prohibitions would serve little purpose if the

trustee were free to authorize others to do what he is forbidden.

While there is no charge of it here, it is obvious that this would

open up opportunities for devious dealings in the name of others

that the trustee could not conduct in his own. The motives of man

are too complex for equity to separate in the case of its trustees

the motive of acquiring efficient help from motives of favoring

help, for any reason at all or from anticipation of counterfavors

later to come. We think that which the trustee had no right to do he

had no right to authorize, and that the transactions were as

forbidden for benefit of others as they would have been on behalf of

the trustee himself.

Id. at 271-72. These principles remain viable today. See, e.g., United

States Trustee v. Bloom (In re Palm Coast, Matanza Shores Ltd.

Partnership), 101 F.3d 253, 257-58 (2d Cir. 1996) (applying common law

of trusts).

A prophylactic rule is needed to address the standing trustees'

current practices of hiring relatives and engaging in other related-

party transactions. Promulgation of the rule will provide direction to

standing trustees about permissible uses of fiduciary funds and will

prevent abuses, thereby benefitting creditors and debtors. The rule

also will assist the United States Trustees' supervision of standing

trustees by providing direction on these important issues. This rule

will bolster public confidence in a bankruptcy system that is operated

fairly and impartially and not for the financial benefit of the

professionals involved.

6. One commenter asked whether the Program intended through the

rule to make standing trustees employees of the United States Trustees.

By promulgating this rule, the Program does not make standing trustees

federal employees.

7. Several commenters submitted their thoughts on handbook

provisions that the United States Trustees implemented in 1996. The

revisions to the handbooks were not published in the Federal Register

and are not within the scope of this rulemaking.

8. One commenter noted that the proposed rule contains no protocol

for starting a chapter 13 office or for the transfer of an existing

office. With respect to related-party allocations, the final rule

provides that United States trustees may, in appropriate circumstances,

permit a newly-appointed standing trustee to contract with or allocate

expenses between related parties. To the extent that this commenter

seeks detailed procedures for starting a standing trustee operation,

that matter is beyond the scope of this rulemaking.

9. One standing trustee described the rule as inequitable because

it ``clearly'' restricts the standing trustees' discretion but does not

decrease their liability.

[[Page 30177]]

The Program believes that this comment misapprehends the scope of

the rule. Section 586 of title 28 requires the United States Trustees

to appoint and supervise the conduct and expenses of standing trustees.

The Program is promulgating the rule in furtherance of these

responsibilities and pursuant to statute.

10. One commenter amended its earlier objections to suggest

detailed factors for the United States trustees to analyze when

considering whether to grant a waiver from the rule's application in

limited situations. The Program has not incorporated the precise

factors suggested because the standard set forth in the rule provides

sufficient flexibility to United States Trustees to consider waiver

requests in light of local or unique circumstances. However, the

Program has made a few technical changes to the standard for waiver by

deleting the requirement of ``extraordinary'' and by clarifying that

waivers may be granted if the standing trustees can demonstrate a

compelling need to the trustee operation and the necessity and

reasonableness of the expense. These technical changes will bolster the

United States Trustees' discretion in these matters and cause the rule

to track more closely the statute's requirements that expenses be

``actual'' and ``necessary.''

B. Comments on Specific Subsections of the Proposed Rule

1. Definition of Relative

Comment: In connection with the initial qualifications for

appointment and the prohibition on hiring of relatives, several

standing trustees commented that they were unclear as to which

relatives were encompassed by the proposed rule.

Response: In response to this comment, the Program has revised the

definition of ``relative'' in 58.4(a)(2) to list each specific

relationship that is subject to the rule. The definition of

``relative'' set forth in the proposed rule was derived from 11 U.S.C.

101(45), which defines ``relative'' as an ``individual related by

affinity or consanguinity within the third degree as determined by the

common law, or individual in a step or adoptive relationship within

such third degree''.

The final rule lists the specific relationships encompassed within

the word ``relative'' to provide clearer guidance to those who must

implement or abide by the rule. Furthermore, the adoption of this

definition will establish a uniform, national standard. Although the

final definition excludes certain relationships that were covered by

the definition in the proposed rule as applied in some jurisdictions

(e.g., great-grandparents, great-aunts, great-uncles, second cousins),

the goal of prohibiting favored treatment and any appearance of

impropriety will be better attained through this more specific

approach.

The language in the final rule is derived from the definition of

``relative'' that applies to United States Trustees with respect to

their hiring, promotion and salary practices. The Civil Service Reform

Act makes nepotism a prohibited personnel practice. 5 U.S.C.

2302(b)(7). Section 3110(b) also prevents a United States Trustee from

appointing, employing, promoting, or in any way advancing one of their

relatives. 5 U.S.C. 3110(b). The term ``relative'' is defined for both

statutory subsections in 5 U.S.C. 3110(a)(3).

In the final rule, the definition of ``relative'' expands the

language in 5 U.S.C. 3110(a)(3) to include ``an individual whose close

association is the equivalent of a spousal relationship.'' This

additional definitional category comports with those courts that have

extended the Bankruptcy Code provisions restricting pre-petition

transfers to insiders or relatives to include those persons living with

debtors in the equivalent of spousal relationships. See, e.g., Gennet

v. Docktor (In re Levy), 185 B.R. 378, 384-85 (Bankr. S.D. Fla. 1995);

Freund v. Heath (In re McIver), 177 B.R. 366, 370-71 (Bankr. M.D. Fla.

1994); Wiswall v. Tanner (In re Tanner), 145 B.R. 672, 677-78 (Bankr.

W.D. Wash. 1992); Loftis v. Minar (Matter of Montanino), 15 B.R. 307,

310-11 (Bankr. D.N.J. 1981).

The definition of ``relatives'' in the final rule is consistent

with federal law and rationally relates to the legitimate governmental

goal of reducing potential or actual improprieties within the standing

trustee employment system. The rest of the definitions in 58.4(a)

remain unchanged.

2. Qualifications for Appointment

Comment: One standing trustee commented that the qualifications for

appointment should be stated in the positive rather than the negative.

Response: The qualifications for appointment are intended to

restrict the United States Trustees' discretion to appoint individuals

as standing trustees. It would be awkward and unclear to express these

restrictions in a positive manner. Accordingly, we reject this comment.

Comment: Several standing trustees commented that the proposed

qualifications for initial appointment of standing trustees are too

narrow and should be expanded. These standing trustees did not agree,

however, as to the scope of expansion. Several standing trustees

believed that the qualifications should prohibit the appointment of

individuals who are relatives of district court and circuit court of

appeals judges; one even suggested that relatives of Supreme Court

justices should not be deemed qualified for appointment.

Response: The Program does not find it necessary to expand the

restriction beyond the bankruptcy judges and clerks in the region where

the standing trustee serves. Through this regulation, the Program seeks

to strengthen the integrity of the bankruptcy administrative process by

circumscribing the United States Trustees' discretion to appoint

certain individuals who are related to standing trustees and other

frequent participants in the federal bankruptcy system. As previously

discussed, the Program was created to remove administrative functions

from the bankruptcy courts and to remedy the existence and perceptions

of cronyism that existed within the prior administrative system. The

rule will promote an appointment process that is based on merit,

untainted by perceptions that appointments are restricted to insiders.

Moreover, it will enhance the integrity of the current system by

reducing--if not eliminating--the opportunities for a bankruptcy court

to be faced with real or perceived conflicts of interest that arise if

the court were to rule on bankruptcy cases in which a relative was the

case trustee.

Finally, promulgation of this rule is consistent with the policies

codified in Fed. R. Bankr. P. 5002, which prohibits nepotism in

bankruptcy court appointments and employment. See 18 U.S.C. 1910

(making it a criminal offense for a judge to appoint a relative as

trustee); 28 U.S.C. 458 (prohibiting judicial appointments or

employment in court offices of relatives of judges).

Comment: One standing trustee commented that the standards for

appointment of United States Trustees and standing trustees should be

the same.

Response: The Program does not find this comment to be apposite.

United States Trustees are senior officials of the Department of

Justice who serve at the pleasure of the Attorney General. United

States Trustees are appointed to a five-year term pursuant to 28 U.S.C.

581 and their obligations to supervise bankruptcy administration and

trustees encompass a wide range of matters detailed in 28 U.S.C. 586.

Their duties cover all chapters of the Bankruptcy Code and include the

duty to assist the

[[Page 30178]]

United States Attorney, upon request, to carry out the prosecution of

federal criminal actions. Because United States Trustees have the

responsibility under 11 U.S.C. 307 to appear in court, the Attorney

General appoints attorneys to these positions. United States Trustees

also serve as policy-making, policy-advocating officers.

Standing trustees are private individuals appointed pursuant to 28

U.S.C. 586(b) to serve as fiduciaries in cases commenced under chapter

12 or chapter 13 of the Bankruptcy Code. Standing trustees must honor

the administrative duties that are outlined in 11 U.S.C. 1202 and 1302;

and the law specifically states that they need not be attorneys. 28

U.S.C. 586(d). Given these differences, we do not find any comparison

between the two positions to be relevant for purposes of analyzing the

rule. We note, however, that applicable law prohibits a United States

Trustee from hiring relatives or taking official actions that affect

their personal or their family's financial interests. 5 U.S.C.

2302(b)(7), 3110(b); 18 U.S.C. 208.

Comment: One standing trustee asked why the initial qualifications

for appointment were being revised.

Response: The rule updates current appointment policy and informs

all prospective applicants of the restrictions applicable to the United

States Trustees' appointment authority. Moreover, as explained above,

the rule avoids many of the actual or perceived conflicts of interest

that arise when a standing trustee is related to other frequent

participants in the bankruptcy system. It therefore promotes the fair

and efficient administration of chapter 12 and chapter 13 estates.

Comment: One standing trustee raised questions concerning the legal

basis for a United States Trustee's refusal to reappoint a standing

trustee. This standing trustee also asked how section 324 of the

Bankruptcy Code affects the United States Trustee's authority to refuse

to reappoint a standing trustee.

Response: Currently there is no reappointment process for standing

trustees once they are appointed. Standing trustees are appointed and

serve until they retire or resign, the Untied States Trustee stops

assigning cases to them, or the bankruptcy court removes them from

their existing cases for cause under 11 U.S.C. 324. See generally

Richman v. Straley, 48 F.3d 1139, 1143-44 (10th Cir. 1995) (discussing

the distinction between removal under section 324 and termination of

future case assignments).

Comment: One standing trustee contended (without discussion) that

the imposition of initial qualifications for appointment violates the

equal protection guarantees in the Federal Constitution.

Response: The Program has the authority under 28 U.S.C. 586 to

promulgate regulations governing the initial qualifications for

appointment. The qualifications contained within this final rule do not

violate the Equal Protection guarantees in the Fifth Amendment to the

Constitution because they do not classify individuals based on

impermissible criteria; nor do they improperly deny applicants a

fundamental constitutional right.

The qualifications promulgated here advance the legitimate

governmental goal of appointing standing trustees who can perform their

fiduciary and statutory obligations free from any actual bias or

potential conflict of interest. The qualifications also further the

legitimate governmental goal of ensuring that its programs, here the

appointment of standing trustees, are administered in a fair and open

manner. The legislative history for the 1978 Bankruptcy Reform Act

chronicled the problems inherent in a closed bankruptcy network run by

insiders. See, e.g., H.R. Rep. No. 595, 95th Cong. 1st Sess. 88-99

(1977). Accordingly, we do not agree with this comment.

Comment: One standing trustee stated that there is no rational

basis for the prohibition against appointing a standing trustee who is

related to another standing trustee.

Response: The Program is a young agency that does not have the

regulatory history of other agencies; however, it does have the benefit

of a century of history of bankruptcy administration and repeated

studies of pre-existing abuses. See, e.g., H.R. Rep. No. 595, 95th

Cong. 1st Sess. (1977), reprinted in 1978 U.S.C.C.A.N. 5963; Report of

the Commission of Bankruptcy Laws of the United States, H.R. Doc. No.

137, 93d Cong. 1st Sess. (1973); Report to the President on the

Bankruptcy Act and its Administration in the Courts of the United

States dated December 5, 1931, reprinted in S. Doc. No. 65, 72d Cong.

1st Sess. (1932); William J. Donovan, House Committee on the Judiciary,

Administration of Bankrupt Estates, 71st Cong. 3d Sess. (Comm. Print

1931). In the past, United States Trustees have appointed individuals

as standing trustees who were related to other standing trustees, but,

based on this experience, they have concluded that such appointments do

not create an optimal situation. For example, certain standing trustees

have indicated that they believed one of their relatives should be

appointed as their successor. These circumstances tend to perpetuate

the perception, if not the existence, of a closed bankruptcy network.

The rule prohibiting appointments of individuals who are relatives of

standing trustees fosters the congressional policy of encouraging an

open bankruptcy system, untainted by cronyism in any form.

3. Hiring of Relatives

Comment: Two standing trustees asserted that the restriction on

their hiring of relatives was unconstitutional. One of these standing

trustees argued that this restriction discriminates against a suspect

class, that of women over the age of 40. The other stated that the

Program is discriminating against a class created by birth or marriage.

Finally, a third standing trustee contended that any individuals

terminated after this rule is promulgated would be denied their rights

to due process. In a variation on this theme, a different standing

trustee argued that, if he is forced to fire his daughter, she will

have a difficult time obtaining comparable employment because her

skills are so specialized.

Response: The prohibition against hiring relatives is intended to

ensure that standing trustees comply with the fiduciary duty of loyalty

and to minimize any incentive or opportunity for standing trustees to

incur unreasonable or unnecessary expenses at the expense of bankruptcy

debtors and creditors. That prohibition does not discriminate against

my suspect class. The rule does not impinge any fundamental rights; and

it does not employ any improper characteristics (such as race, national

origin, citizenship, or sex) to define the affected persons. Indeed,

non-spousal relatives who will be affected by the rule include men and

women.

Second, promulgation of the rule does not violate the Due Process

Clause, U.S. Const. amend. V. The rule does not deprive the affected

relatives of any liberty or property interest; and it rationally

relates to the legitimate governmental interest in the fair, impartial,

and efficient administration of chapter 12 and chapter 13 bankruptcy

estates. Nor do standing trustees have any such liberty or property

interest because expenses are budgeted and approved on a year-to-year

basis. There is no guarantee that a standing trustee will get new cases

or a similar number of cases every year, that the same expenses will be

approved from year to year, or that the percentage fee will be

sufficient each year to cover long-term expenses that the standing

trustee has incurred. Thus, a standing trustee has

[[Page 30179]]

no entitlement to have future expenses compensated in precisely the

same manner that they were compensated in the past.

Finally, the affected relatives are employed in jobs requiring

legal, clerical, administrative, accounting or computer skills that can

be transferred to other positions within the public or private sectors.

Since the relatives are presumed to be paid market salaries (or even

less than market rates, as some commenters suggest), these relatives

should be able to obtain other similar positions during the transition

period provided.

Comment: One standing trustee asserted without evidentiary support

that the prohibition on employment of relatives is not necessary

because situations in which standing trustees employ relatives are more

the exception than the rule. This standing trustee also contended,

again without evidence, that relatives in smaller offices are paid less

than market rate and bear more responsibility than the average

employee.

Response: In FY 1996, 50 of the 170 appointed chapter 13 trustees

had hired relatives to work for them as employees. This represents 30

percent of all chapter 13 trustees, not an insignificant percentage.

With respect to salaries, the Program has no evidence--and the

standing trustees presented no evidence--to support the position that

relatives in smaller offices currently receive less than market rate

and bear more responsibility than their counterparts in larger offices.

Moreover, the relationship between the standing trustee and his or her

relatives may affect the exercise of the standing trustee's judgment

and may make it difficult, if not impossible, for the standing trustee

to make a fair and unbiased assessment of the work performed by his or

her relative.

Comment: Several standing trustees and their associations

criticized the application of this rule to relatives other than

spouses. These commenters argue that imposition of the rule on non-

spousal relatives will lead to unfair and inappropriate results; that

there is no rational distinction between spouses and other relatives;

and that the implementation of this standard will cause standing

trustees to lose experienced and valuable personnel who they cannot

quickly replace. One standing trustee argued that the rule should be

modified to address nepotism issues on a case-by-case basis. Others

contended that all relatives currently employed by standing trustees

should be exempted from the rule's application.

Response: The Program does not find these arguments persuasive. The

rule proscribes the employment of all relatives in the future, spouses

and non-spousal relatives alike. This comment is addressed to

subsection (d)(1)(iii) of the rule in which the Program exempted those

spouses employed as of August 1, 1995, from the rule's application.

With respect to relatives who are not spouses, the Program has delayed

implementation until October 1, 1998 to provide a transition period.

A prophylactic rule is needed to address the employment of

relatives because, in the Program's experience, abuses within the

system are not readily discovered or easily remedied. When the standing

trustee decides to add a new employee to the payroll, selects an

applicant for the job, establishes compensation, and determines an

employee's advancement, the standing trustee's objectivity inevitably

is called into question when the decision involves the trustee's

relative. It is also difficult for the United States Trustee to

evaluate the necessity of the expense without inquiring into the

standing trustee's motives or at least the determination that the

relative was hired on the basis of merit, that the employed relative

was performing duties commensurate with the relative's salary, or that

an employed relative deserved a raise or promotion. The United States

Trustees do not have the resources to conduct such examinations every

time a standing trustee wants to hire, promote, or increase the salary

of a relative; and, even if resources were available, such examinations

would likely be perceived as micromanagement of the standing trustee

operations.

We also note that employees in offices where relatives have left

the trustees' employ have commented on the improvement in office morale

after the relative no longer worked in the office. Such comments

support our conclusion that the implementation of this rule will help

ensure that chapter 12 and chapter 13 cases are administered fairly and

efficiently and solely for the benefit of the debtors and creditors who

have an interest in the property of the estates.

The rule recognizes, however, that to impose this regulation

immediately on all relatives may cause some disruption to the

operations of standing trustees. Standing trustees argued that the

local employment base in rural areas may make it difficult for those

standing trustees to find personnel with comparable skills and

experience to replace their spouses. Moreover, because many spouses are

employed in supervisory or management positions and because spouses

generally helped the standing trustees to start their operations, the

rule excepts all spouses employed by the standing trustees as of August

1, 1995, the date on which the Program first distributed draft

standards prohibiting the employment of relatives. To minimize any

disruption with respect to non-spousal relatives, the Program has

delayed implementation of this rule concerning those relatives until

October 1, 1998. This period will give standing trustees time to hire

and train other employees and has the added benefit of enabling

affected relatives to find alternative employment in an orderly

fashion. Finally, in situations where standing trustees can demonstrate

the existence of compelling circumstances for the trustee operations

and can show that the employees are being paid no greater than market

rates, the rule gives the United States Trustees the discretion to

grant a two-year waiver for those standing trustees to continue to

employ a non-spousal relative. This waiver can be renewed if the

standing trustee continues to satisfy the waiver requirements in the

rule.

Comment: One standing trustee contended that the rule prohibiting

nepotism should not be applied because no government funds are involved

in a chapter 13 trustee operation and, thus, the Program is interfering

in what is essentially a private enterprise.

Response: The Program disagrees with this analysis. A standing

trustee operation differs dramatically from a private enterprise in

that it is funded entirely from debtor receipts and is not subject to a

competitive market. Debtors are not allowed to choose their standing

trustee. Most areas have only one standing trustee and chapter 13 or

chapter 12 debtors are forced to use the standing trustee in their

area, regardless of the debtor's satisfaction with services rendered.

Even in the minority of areas where more than one standing trustee

serves, a debtor is assigned to a specific trustee and there is no

administrative mechanism to transfer the case if a debtor is unhappy

with the trustee's performance or expenditures, short of asking the

court to remove the trustee under 11 U.S.C. 324. Indeed, the standing

trustee system is the only system within the Bankruptcy Code that does

not permit election of case trustees. Cf. 11 U.S.C. 702, 1104. In

conclusion, competition, which helps keep private enterprises' expenses

low, does not operate in the standing trustee system.

Moreover, as fiduciaries, the standing trustees owe their

allegiance to the bankruptcy estates they administer, not to third

parties such as their relatives. The Program has a statutory

[[Page 30180]]

responsibility to establish the maximum annual compensation of standing

trustees and to establish a percentage fee that will cover the standing

trustees' compensation and ``actual, necessary expenses incurred by''

the standing trustees. 28 U.S.C. 586(e)(1). The Program is promulgating

this rule to ensure that the percentage fees collected from chapter 12

and chapter 13 cases are used to pay only those expenses that are

``actual'' and ``necessary'' and that standing trustees fulfill their

fiduciary duties undistracted by their own self-interests or familial

interests.

Comment: Several standing trustees asserted that the imposition of

this standard will interfere unnecessarily with employment

relationships. One standing trustee commented that if employees are

receiving market rates as salaries, their hiring should not be

prohibited merely because they are related to the standing trustee.

Response: The rule does not unduly interfere with the standing

trustee's employment relationships. A standing trustee who hires

relatives has dual and perhaps competing loyalties: loyalties to his or

her family members and loyalties to debtors and creditors in bankruptcy

cases. As noted above, such conflicts of interest are inconsistent with

the standing trustee's duty of undivided loyalty to the trust.

Moreover, because debtors do not choose their trustee, there are no

market forces to ensure that the standing trustee minimizes the costs

to the estate. Although the United States Trustees supervise standing

trustees and review the appropriateness of all expenses, they do not

have the resources to examine the day-to-day expenses of each standing

trustee to make sure that each payment to the standing trustee's

relative is, indeed, an ``actual, necessary expense'' that is properly

charged to the estate.

Comment: One standing trustee argued that he should be permitted to

hire his children at minimum wage for a limited number of hours per

quarter ``to accomplish tasks around the office that would be too

expensive or inefficient to contract for and too far outside the job

descriptions of staff members to assign to them.'' He cited as an

example the task of stuffing envelopes.

Response: The Program does not question the standing trustee's

purported need to stuff envelopes or perform other ministerial tasks.

It is unclear why a relative is better suited than other regular

employees to perform these tasks or why regularly employed clerical

staff do not already perform these duties. The rule does not interfere

with a standing trustee's ability to hire necessary staff, whether

temporary, part-time or full-time; it prohibits only the employment of

relatives.

Comment: One association asserted that the rule does not account

for local considerations or the economic detriment to bankruptcy

estates that will be caused if trustees can no longer employ relatives.

Response: The rule prohibiting employment of non-spousal relatives

will not be enforced until October 1, 1998, which should give the

standing trustee time to hire a suitable replacement. After that date,

the Program has accounted for local considerations and economic factors

by permitting a standing trustee to seek a wavier of the rule

prohibiting employment of non-spousal relatives in situations where

compelling circumstances exist.

4. Related Party Transactions

Comment: Several standing trustees and their organizations contend

that it is unfair to forbid related party transactions and allocations

when certain transactions and allocations have been permitted in the

past. These commenters also assert that implementation of this standard

will violate and interfere with vested contract rights of related

parties. Finally, one association characterizes the rule as unfair

because it terminates contracts for no legal or valid basis.

Response: The Program has concluded that, in the future, it should

not permit contracts or allocations between standing trustees and

related third parties except in narrow circumstances. A prophylactic

rule is desirable because, when a trustee purchases or leases goods or

services from himself or a related party, it is difficult to detect or

remedy circumstances in which estate funds are being used

inappropriately.

The rule will go into effect with respect to existing standing

trustees on the first day of their next fiscal year. However, because

some standing trustees have contractual relationships with related

parties, and, in some cases, it would pose an undue hardship to end

those contractual relationships by the first day of the next fiscal

year, the rule provides for delayed implementation in appropriate

situations. For instance, the rule permits a United States Trustee to

grant a reasonable extension to a standing trustee who needs additional

time to comply with this rule. To obtain an extension, the standing

trustee must submit written evidence, satisfactory to the United States

Trustee, to demonstrate that the expense is necessary and at or below

market rate.

The rule also provides for waiver in certain limited situations

where the standing trustee has a natural incentive to conserve

expenses. For instance, a newly-appointed trustee can apply for a

waiver from the prohibition on related-party transactions and

allocations if the standing trustee can demonstrate in writing that the

waiver is necessary for the trustee operation and the cost for which

the trustee seeks permission is at or below market rate. United States

Trustees are given the flexibility to permit an exception in these

circumstances because trustees who are starting their operations and

are not receiving maximum compensation have an inherent incentive to

keep their expenses low. This flexibility also will assist new trustees

in starting their operations.

The rule also permits a standing trustee who has not earned maximum

compensation to seek a provisional waiver from the prohibition on

related-party allocations. Economic reality requires distinguishing in

appropriate circumstances between standing trustees who are earning

maximum compensation and those who are not. Under the fee structure

established in 28 U.S.C. 586, a standing trustee must pay expenses

first, his or her compensation second, and any excess monies to the

United States Trustee System Fund. When a standing trustee is earning

less than maximum allowable compensation, every dollar used to pay for

expenses is one less dollar that is available to fund compensation. The

incentive to minimize expenses because the standing trustee otherwise

will receive reduced compensation is lacking for the approximately 80

percent of chapter 13 trustees who in FY 96 received maximum

compensation of $124,333, plus all expenses.

Once standing trustees are earning maximum compensation, the only

way they can increase their compensation is indirectly. A standing

trustee who is also a practicing attorney could offer a justification

to acquire a law library payable out of the trustee expense funds when,

in fact, the library is intended to benefit the law firm primarily,

thereby subsidizing the law firm's expenses and increasing the profit

to the firm's members. One standing trustee justified unfettered

expenses by asserting that the system does ``not cost taxpayers a

penny.'' Although the costs of operating the standing trustee system

are not paid by a direct appropriation from Congress, they are borne by

debtors' payments under the financing mechanism in 28 U.S.C. 586.

Because the economic pressures to minimize expenses cease to exist

once

[[Page 30181]]

standing trustees are earning maximum compensation, there is a rational

basis to permit trustees who are not earning maximum compensation to

allocate certain expenses while simultaneously prohibiting trustees who

receive maximum compensation from allocating expenses.

Finally, the United States Trustee has the power to grant a

provisional waiver of the allocation prohibition to a standing trustee

who serves in both chapter 12 and chapter 13 cases. These circumstances

do not involve a trustee who is contracting or allocating with a

related party. Trustees in these situations are sharing or allocating

expenses between two trusts. Thus, the conflicts of interest inherent

when a standing trustee contracts or allocates with himself or a

related party do not exist.

Comment: One standing trustee commented that the rule as to

related-party transactions is unreasonable when applied to standing

trustees who are also attorneys. This standing trustee asserted,

without evidence, that if he is forced to move the trustee operations

from his law office, the trustee will incur larger rent expenses.

Another standing trustee argued that the present policy allowing

allocations permits standing trustees to ``effect economies not

otherwise available.''

Response: Whether a standing trustee administers 1,000 cases or

10,000 cases, the trustee's maximum annual compensation cannot exceed

the statutory limit, nor can the total amount of compensation and

expenses exceed 10% of the total plan payments. Although the numbers of

cases being administered certainly allows standing trustees to achieve

economies of scale, the Program has not found that allocation of

expenses among related parties, itself, has permitted ``economies of

scale not otherwise available.'' To the contrary, the Program has found

that this is a very difficult and troubling area to monitor.

Many trustees engage in other occupations, particularly as

attorneys. The desire to keep both the standing trustee office and the

law firm operating under the same roof is understandable, because the

situation is convenient, and likely well-intentioned. Once the standing

trustee operations grow to the point that they are able to support

maximum compensation for the trustee and all the trustee's costs, the

trustee can increase his or her compensation by having the trustee

operation enter into a contract with a person or entity who is related

to the trustee. For example, the trustee could have his or her law

partnership lease office space or equipment to the trustee operation.

The trustee would then receive compensation and the income derived from

the lease, a situation too easily susceptible to manipulation and

difficult to detect. Accordingly, related-party transactions and

allocations in the future will be permitted only in limited

circumstances that are amenable to adequate supervision or where the

incentive ``to keep costs low at the risk of reduced compensation''

still exists.

Comment: A standing trustee and one association stated that,

although standing trustees should not profit from the trust, neither

should they incur a loss. These commenters hypothesized that it might

not be practical for smaller standing trustees to purchase separate

equipment, computers, furniture, etc. for the exclusive use of the

trustee's office and argued that the United States Trustee should

permit some reasonable allocation of cost sharing. Finally, the

association stated that the United States Trustee has offered standing

trustees no real opportunity to try to refute the conclusion that

allocations are inappropriate.

Response: As discussed above, under the rule, a standing trustee

who is not earning maximum compensation may seek a provisional waiver

from the supervising United States Trustee. A provisional waiver also

may be requested if the standing trustee serves in chapter 13 and

chapter 12 cases and the trustee wishes to allocate between these two

operations. Therefore, the Program has provided for allocations in

warranted circumstances.

Regarding the comment that trustees should not be forced to operate

at a loss, all actual and necessary expenses are funded by debtors'

payments under the statutory scheme set out in 28 U.S.C. 586. Standing

trustees do not personally pay expenses. All expenses are paid out of

the trust fund, including any monies that the standing trustee advanced

for expenses during the start-up phase of a new trustee operation.

Trustees who administer a large number of cases will be able to absorb

any cost differential in operational and overhead expenses. The Program

cannot assess the economic impact on the standing trustee's personal

interests in related entities, however.

The Program has made a policy decision, based on its experience, to

prohibit future transactions and expense allocations between related

parties. This decision will provide clearer direction to those who must

abide by and those who must administer the strictures of 28 U.S.C.

586(e).

Comment: Several standing trustees and an association commented

that this rule violates the Bankruptcy Code because United States

Trustees do not have the jurisdiction to decide whether expenses are

``actual and necessary''. Pursuant to this perspective, the United

States Trustees can only rubber-stamp the expenses submitted by the

standing trustees; if there is any dispute about these expenses, only

the bankruptcy courts have the authority to decide the question. The

association added that the standing trustee's role is to seek a court

ruling on any items that the United States Trustee disputes as

unnecessary.

Response: These comments do not comport with the compensation

scheme outlined in 28 U.S.C. 586(e), which both empowers and obligates

the Attorney General, in consultation with the United States Trustees,

to establish compensation and a percentage fee for standing trustees.

As discussed in the General Comments above, the Attorney General--

not bankruptcy courts--is empowered to establish compensation for each

standing trustee. Once compensation has been set, the statute then

requires the Attorney General to establish a percentage fee sufficient

to pay the trustee's compensation and all actual, necessary expenses.

28 U.S.C. 586(e)(1).

The language ``actual, necessary'' is language of limitation that

modifies the noun ``expenses.'' Thus, Congress did not want to permit

standing trustees to recoup every expense no matter how remotely

related to the trustee operation. Moreover, Congress did not define the

words ``actual'' and ``necessary.'' Cf. 11 U.S.C. 330 (where Congress

engrafted various factors for the bankruptcy courts to consider when

awarding fees to trustees in chapter 7 and 11 cases and other

professionals). See also Patterson v. Shumate, 504 U.S. 753, 758 (1992)

(use of broad language supports more expansive reading especially when

Congress has used narrower language in other subsections of statute).

Instead, Congress authorized the Attorney General to decide which

expenses are ``actual'' and ``necessary'' and thus are appropriately

factored into the percentage fees charged to the bankruptcy cases. At

the same time, Congress mandated in section 326(b) that ``[i]n a case

under chapter 12 or 13 of this title, the court may not allow

compensation for services or reimbursement of expenses of the United

States trustee or of a standing trustee appointed under section 586(b)

of title 28, * * *'' Congress entrusted the administration of the

standing trustee system, including the calculation of compensation and

percentage fees, to

[[Page 30182]]

the Attorney General, not the bankruptcy courts.

Comment: One standing trustee argued that the need to prohibit

related-party transactions is undercut by the fact that this standard

is not to be implemented until 2005 in certain situations. This

standing trustee concluded that the United States Trustees must not

believe that related-party transactions are really a problem.

Response: The delayed implementation of this rule in limited

situations involving real estate is not a reflection of the need for

the rule. Instead, it reflects the Program's desire to minimize the

disruption in the administration of chapter 12 and chapter 13 estates

that might otherwise result from immediate implementation.

Comment: Two standing trustees asserted there is no rational

justification for the distinction in treatment between smaller trustees

and those who earn maximum compensation. A variation on this assertion

was the comment that existing budgeting and auditing procedures should

be sufficient to prevent improper expenditures.

Response: As explained in detail earlier in this subsection, there

are valid economic reasons to distinguish between standing trustees who

are earning maximum compensation and those who are not. Those standing

trustees who are earning less than maximum allowable compensation have

an incentive to minimize expenses because every dollar that is used on

expenses means one less dollar is available to pay for the trustee's

compensation.

Comment: One commenter stated that the rule with respect to

allocations is unfair because chapter 7 trustees are permitted to

allocate costs among their individual chapter 7 cases.

Response: There are different methods for allocating costs and

expenses in chapter 7 cases and chapter 12 or 13 cases. As noted above,

section 586(e) directs the Attorney General to establish a percentage

fee that is collected from all plan payments received by the standing

trustee. The monies generated by these fees are then used to pay the

compensation of the standing trustee and the ``actual, necessary

expenses incurred by such individual as standing trustee'' in

administering all chapter 12 or chapter 13 cases. 28 U.S.C. 586(e)(1).

In contrast, the compensation and reimbursement of expenses of

chapter 7 trustees are determined on a case-by-case basis after an

application, notice, a hearing, and a court order. Courts generally

allow a chapter 7 trustee to be reimbursed for expenses that he or she

incurs to administer a discrete and identifiable chapter 7 estate. The

chapter 7 trustee is prohibited from recovering overhead or ``general

`stay in business' costs''. See, e.g., Sousa v. Miguel (In re United

States Trustee), 32 F.3d 1370, 1376-77 (9th Cir. 1994). As the Ninth

Circuit has observed, standing trustees operate under a different

mechanism, which makes their compensation and expenses inapposite to

the analysis required to award compensation in chapter 7 cases. Id. at

n. 5. See also Dunivent v. Schollett (In re Schollett), 980 F.2d 639,

643-45 (10th Cir. 1992); In re Savage. 67 B.R. 700, 706-07 (D.R.I.

1986) (Selya, J.).

Comment: One standing trustee asserted, without proof, that the

commercial reasonableness of contractual relationships, including those

between related parties, is ``easily and objectively measurable'' and,

therefore, should be permitted.

Response: As discussed in other responses to this subsection,

contractual relationships between related parties are not ``easily and

objectively measurable.'' Moreover, when standing trustees use

fiduciary funds to lease property from themselves or related parties,

the trustees are using fiduciary funds for their own personal or

family's benefit, and are abrogating their fiduciary duty of loyalty.

Even where these dealings are well-intentioned and not motivated by a

desire for personal profit, standing trustees in these circumstances

have created an irreconcilable conflict and, at the very least, an

appearance of impropriety.

5. Employment of Other Standing Trustees

Comment: One standing trustee questioned the basis for this

standard.

Response: This rule simply memorializes current practice pursuant

to which the Program prohibits one standing trustee from hiring

another. The rationale behind this policy is to eliminate any conflicts

of interest or dual loyalties and to prevent a reoccurrence of the

closed bankruptcy network that existed prior to the Program's creation.

Comment: Two commenters asserted that imposition of this standard

has the potential to restrict standing trustees from hiring their most

effective or cost-efficient counsel. One of these commenters cited as

an example his use of another standing trustee as an expert witness in

a bankruptcy case. The commenter noted that the standing trustee who

served as the expert witness received no fee.

Response: The imposition of this rule should not create additional

costs. Indeed, the standing trustee and the association who made this

comment conceded no existing attorney-client relationships were

affected by the rule. Furthermore, the promulgation of the rule will

not prevent a standing trustee from serving as an expert witness in the

circumstances that one commenter described because the testifying

trustee did not receive a fee. The rule permits one standing trustee to

assist another provided no compensation is paid. Expenses for the

assisting standing trustee can be reimbursed provided that the United

States Trustee has pre-approved this expenditure.

Comment: One standing trustee argued against the imposition of this

standard, alleging that the Department of Justice currently has a

conflict of interest in that the Department represents major federal

claimants in bankruptcy and the United States Trustees. Alternatively,

this commenter contended that this dual representation by the

Department should be banned.

Response: Congress has determined as a matter of public policy that

the Program most appropriately resides in the Department of Justice.

The legislative history for the Bankruptcy Reform Act of 1978

demonstrates that ``[t]he decision to place the United States trustee

system in the Department of Justice was reached as a result of thorough

deliberations'', including careful consideration of the same conflicts

of interest raised by these commenters. H.R. Rep. No. 595, 95th Cong.,

1st Sess. 111 (1977), reprinted in 1978 U.S.C.C.A.N. 6072-73. After

analyzing this issue, Congress rejected the concern about such

conflicts of interest as being ``theoretical, not real.'' H.R. Rep. No.

595, 95th Cong., 1st Sess. 114 (1977), reprinted in 1978 U.S.C.C.A.N.

6075. This issue was raised and again rejected when Congress expanded

the Program nationwide in 1986. See, e.g., The United States Trustee

System: Hearing Before the Subcomm. on Courts of the Senate Comm. on

the Judiciary, 99th Cong., 2d Sess. (1986). Thus, in deciding to place

the Program within the Department, Congress considered and rejected the

very argument this standing trustee raised in objection to the rule.

Certifications

Executive Order 12866

This rule has been drafted and reviewed in accordance with

Executive Order 12866, section 1(b), Principles of Regulation. The

Director, Executive Office for United States Trustees, (``Director'')

has determined that this rule is not a ``significant regulatory

action'' under Executive Order 12866,

[[Page 30183]]

section 3(f), Regulatory Planning and Review, and, accordingly, this

rule has not been reviewed by the Office of Management and Budget.

Regulatory Flexibility Act

In accordance with the Regulatory Flexibility Act (5 U.S.C.

Sec. 605(b)), the Director has reviewed this rule and by approving it

certifies that it will not have a significant impact on a substantial

number of small entities. The only parties affected are the

approximately 200 individuals who serve as standing trustees. Moreover,

the rule provides direction to standing trustees in the performance of

their fiduciary duties and, thus, will not have a significant economic

impact.

Paperwork Reduction Act

This rule contains no new information collection or recordkeeping

requirements under the Paperwork Reduction Act (44 U.S.C. 3501 et

seq.).

Unfunded Mandates Reform Act of 1995

This rule will not result in the expenditure by State, local and

tribal governments, in the aggregate, or by the private sector, of

$100,000,000 or more in any one year, and it will not significantly or

uniquely affect small governments. Therefore, no actions were deemed

necessary under the provisions of the Unfunded Mandates Reform Act of

1995.

Small Business Regulatory Enforcement Fairness Act of 1996

This rule is not a major rule as defined by Sec. 804 of the Small

Business Regulatory Enforcement Fairness Act of 1996. This rule will

not result in an annual effect on the economy of $100,000,000 or more;

a major increase in costs or prices; or significant adverse effects on

competition, employment, investment, productivity, innovation, or on

the ability of United States-based companies to compete with foreign-

based companies in domestic and export markets.

List of Subjects in 28 CFR Part 58

Bankruptcy, Trusts and trustees.

For the reasons set forth in the preamble, the Department of

Justice proposes to amend 28 CFR part 58 as follows:

PART 58--REGULATIONS RELATING TO THE BANKRUPTCY REFORM ACTS OF 1978

AND 1994

1. The authority citation for part 58 is revised to read as

follows:

Authority: 28 U.S.C. 509, 510, 586, 5 U.S.C. 301.

2. In Sec. 58.1, paragraph (a) is revised to read as follows:

Sec. 58.1 Authorization to establish panels of private trustees.

(a) Each U.S. Trustee is authorized to establish a panel of private

trustees (the ``panel'') pursuant to 28 U.S.C. 586(a)(1).

* * * * *

3. Section 58.4 is revised to read as follows:

Sec. 58.4 Qualifications for appointment as standing trustee and

fiduciary standards.

(a) As used in this section--

(1) The term standing trustee means an individual appointed

pursuant to 28 U.S.C. 586(b).

(2) The term relative means an individual who is related to the

standing trustee as father, mother, son, daughter, brother, sister,

uncle, aunt, first cousin, nephew, niece, husband, wife, father-in-law,

mother-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-

law, stepfather, stepmother, stepson, stepdaughter, stepbrother,

stepsister, half brother, half sister, or an individual whose close

association to the standing trustee is the equivalent of a spousal

relationship.

(3) The term financial or ownership interest excludes ownership of

stock in a publicly-traded company if the ownership interest in not

controlling.

(4) The word region means the geographical area defined in 28

U.S.C. 581.

(b) To be eligible for appointment as a standing trustee, an

individual must have the qualifications for membership on a private

panel of trustees set forth in Secs. 58.3 (b)(1)-(4), (6)-(8). An

individual need not be an attorney to be eligible for appointment as a

standing trustee. A corporation or partnership may be appointed as

standing trustee only with the approval of the Director.

(c) The United States Trustee shall not appoint as a standing

trustee any individuals who, at the time of appointment, is:

(1) A relative of another standing trustee in the region in which

the standing trustee is to be appointed;

(2) A relative of a standing trustee (in the region in which the

standing trustee is to be appointed), who, within the preceding one-

year period, died, resigned, or was removed as a standing trustee from

a case;

(3) A relative of a bankruptcy judge or a clerk of the bankruptcy

court in the region in which the standing trustee is to be appointed;

(4) An employee of the Department of Justice within the preceding

one-year period; or

(5) A relative of a United States Trustee or an Assistant United

States Trustee, a relative of an employee in any of the offices of the

United States Trustee in the region in which the standing trustee is to

be appointed, or a relative of an employee in the Executive Office for

United States Trustees.

(d) A standing trustee must, at a minimum, adhere to the following

fiduciary standards:

(1) Employment of Relatives. (i) A standing trustee shall not

employ a relative of the standing trustee.

(ii) A standing trustee shall also not employ a relative of the

United States Trustee or of an Assistant United States Trustee in the

region in which the trustee has been appointed or a relative of a

bankruptcy court judge or of the clerk of the bankruptcy court in the

judicial district in which the trustee has been appointed.

(iii)(A) Paragraphs (d)(1) (i) and (ii) of this section shall not

apply to a spouse of a standing trustee who was employed by the

standing trustee as of August 1, 1995.

(B) For all other relatives employed by a standing trustee as of

August 1, 1995, paragraphs (d)(1) (i) and (ii) of this section shall be

fully implemented by October 1, 1998, unless specifically provided

below:

(1) The United States Trustee shall have the discretion to grant a

written waiver for a period of time not to exceed 2 years upon a

written showing by the standing trustee of compelling circumstances

that make the continued employment of a relative necessary for a

standing trustee's performance of his or her duties and written

evidence that the salary to be paid is at or below market rate.

(2) Additional waivers, not to exceed a period of two years each,

may be granted under paragraph (d)(1)(iii)(B)(1) of this section

provided the standing trustee makes a similar written showing within 90

days prior to the expiration of a present waiver and the United States

Trustee determines that the circumstances for waiver are met.

(3) No waivers will be granted for a relative of the United States

Trustee or of an Assistant United States Trustee.

(2) Related Party Transactions. (i) A standing trustee shall not

direct debtors or creditors of a bankruptcy case administered by the

standing trustee to an individual or entity that provides products or

services, such as insurance or financial counseling, if a standing

trustee is a relative of that individual or if the standing trustee or

relative has a financial or ownership interest in the entity.

[[Page 30184]]

(ii) A standing trustee shall not, on behalf of the trust, contract

or allocate expenses with himself or herself, with a relative, or with

any entity in which the standing trustee or a relative of the standing

trustee has a financial or ownership interest if the costs are to be

paid as an expense out of the fiduciary expense fund.

(iii) (A) The United States Trustee may grant a waiver from

compliance with paragraph (d)(2)(ii) of this section for up to three

years following the appointment of a standing trustee if the newly-

appointed standing trustee can demonstrate in writing that a waiver is

necessary and the cost is at or below market.

(B) The United States Trustee may grant a provisional waiver from

compliance with the allocation prohibition contained in paragraph

(d)(2)(ii) of this section if one of the following conditions is

present:

(1) A standing trustee has insufficient receipts to earn maximum

annual compensation as determined by the Director during any one of the

last three fiscal years and provides the United States Trustee with an

appraisal or other written evidence that the allocation is necessary

and the allocated cost is at or below market rate for that good or

service, or

(2) A Chapter 13 standing trustee also serves as a trustee in

Chapter 12 cases and provides the United States Trustee with an

appraisal or other written evidence that the allocation is necessary

and the allocated cost is at or below market rate for that good or

service.

(C) Except as otherwise provided in this paragraph, a standing

trustee may seek a reasonable extension of time from the United States

Trustee to comply with paragraph (d)(2)(ii) of this section. To obtain

an extension, a standing trustee must demonstrate by an appraisal or

other written evidence, satisfactory to the United States Trustee, that

the expense is necessary and at or below market rate. In no event shall

an extension be granted for the use and occupation of real estate

beyond October 1, 2005. For personal property and personal service

contracts, no extension shall be granted beyond October 1, 1998.

(3) Employment of Other Standing Trustees. A standing trustee shall

not employ or contract with another standing trustee to provide

personal services for compensation payable from the fiduciary expense

fund. This section does not prohibit the standing trustee from

reimbursing the actual, necessary expenses incurred by another standing

trustee who provides necessary assistance to the standing trustee

provided that the reimbursement has been pre-approved by the United

States Trustee.

(e) Paragraph (d) of this section is effective July 2, 1997. As to

those standing trustees who are appointed as of July 2, 1997, paragraph

(d) will be applicable on the first day of their next fiscal year

(i.e., October 1, 1997 for chapter 13 trustees and January 1, 1998 for

chapter 12 trustees).

Dated: May 22, 1997.

Joseph Patchan,

Director.

[FR Doc. 97-13970 Filed 5-30-97; 8:45 am]

BILLING CODE 4410-40-M